China Frauds May Fit Panics, Crashes Model, SocGen’s Grice Says

Nov. 7 (Bloomberg) -- Growing evidence of corporate fraud
and corruption on infrastructure projects signals that a crisis
is looming in China, if history is any guide, according to Dylan
Grice, a global strategist at Societe Generale SA.

China is displaying all the signs of the typical financial
crisis laid out in economist Charles Kindleberger’s history of
manias, panics and crashes, London-based Grice said in a
research note dated Nov. 4.

Recent developments in China have been in line with
Kindleberger’s five-stage model of a financial crisis, based on
the work of Hyman Minsky, Grice said. Those include revelations
of fraud, “aggressive and sudden credit expansion,” and “the
pervasive feeling that ‘China is different,’" he said.

Grice has long been bearish on China, saying in November
last year that the economy would have a ‘‘hard landing’’ in 12
months to 18 months followed by deflation. Estimates for a
‘‘soft landing’’ in China are another ‘‘pyramid of piffle,’’ his
colleague Albert Edwards wrote in an Oct. 20 note.

China’s gross domestic product has grown 11.2 percent on
average over the past five years. Societe Generale expects
expansion of 9.2 percent this year and 8.1 percent in 2012.

China has just moved from stage three, known as
‘‘euphoria,’’ to stage four, the ‘‘crisis’’ phase, characterized
by an uneasy period of financial distress often accompanied by a
move to increase liquidity, Grice said in his Nov. 4 note. ‘‘I’m
worried about what stage five (revulsion) will look like.’’

Anti-Corruption Campaign

China this year has made an anti-corruption campaign its
top priority in an effort to address mounting discontent over
the abuse of power and a widening income gap. Premier Wen Jiabao
in February pledged to root out misrule and said the government
will monitor its officials.

Minister of Railways Liu Zhijun was dismissed in February
and placed under investigation for ‘‘severe violations of
discipline’’ and receiving bribes. The ministry’s deputy chief
engineer, Zhang Shuguang, was removed the following month and
faced a similar investigation.

The U.S. Securities and Exchange Commission last year
formed a task force to examine China-based reverse merger
companies and their auditors after businesses including Sino-Forest Corp. and China MediaExpress Holdings Inc. faced
allegations of accounting abuses and fraud by Muddy Waters LLC.
Reverse mergers involve buying public shell companies to gain
stock market listings in North America, avoiding the scrutiny of
an initial public offering.

Factors including corruption in infrastructure industries
and allegations of fraud among reverse takeover companies feel
‘‘very stage four’’ of a crisis, Grice said.

‘‘It’s possible that the Chinese can keep the plates
spinning for a few more years yet,’’ Grice said. ‘‘But economic
expectations are always too sanguine before bubbles burst.’’